Why Beijing shouldn’t worry about Manila’s military upgrades

East Asia Forum - Fri, 04/18/2014 - 17:00

Author: Joseph Franco, RSIS

On 28 March 2014 Manila signed a US$420 million contract for the delivery of 12 Korean Aerospace Industries FA-50 aircraft for light surface attack and lead-in fighter roles. The purchase marked the return of the Philippine air force to the jet age. So far, it is the highest point in the Philippines’ gradual build-up of a ‘minimum credible defence posture’, and a recapitalisation of Southeast Asia’s least-capable military with the support of the US.

The upgrade can be easily cast as Manila’s response to the increasing assertiveness of China over its territorial claims in the South China Sea (known as the West Philippine Sea in the Philippines). Currently, the most likely flashpoint has shifted to Ayungin Shoal following China’s demand that the Philippines remove a beached Filipino warship that it has converted into an outpost. Tensions between Manila and Beijing reached a tipping point in 2012 with a standoff in Scarborough Shoal when the Philippine Navy’s frigate BRP Gregorio Del Pilar attempted to expel Chinese fishing boats. The incident was framed by Beijing as a disproportionate use of the Philippine military, leading to China’s de facto control over the shoal.

Compared to the Philippines’ 2007 Capability Upgrade Program, which focused on basic move-shoot-communicate assets (such as handheld radios, body armour, troop carriers), recent acquisitions have a clear external defence orientation. This explains the focus on offshore patrol vessels (OPV) and aircraft purchases.

The reorientation is made possible by the winding down of internal security threats, which have preoccupied the Armed Forces of the Philippines (AFP) over the last 12 years. Recent developments such as the signing of a peace agreement with the largest Muslim secessionist group in Mindanao, and the arrest of the top leadership of the communist insurgent movement, have highlighted the improved internal security situation. The current AFP counterinsurgency strategy calls for a phased transition to external defence that is to be completed by 2016.

Yet Manila’s shopping list remains limited by fiscal constraints. The two Del Pilar-class vessels, while adequate for Exclusive Economic Zone and offshore patrol vessel-type duties, carry similarly limited armaments to the Jacinto-class OPVs. The Jacintos prior to the Del Pilar, were then the PN’s most blue ocean-capable ships.  The Del Pilar’s capability to conduct helicopter flight operations and stay on station longer is the only incremental improvement it has over the Jacintos. The addition of expensive systems such as anti-ship missiles and anti-submarine warfare equipment is highly contingent on additional funding.Concerns have been raised over whether supplemental funding for the AFP will continue after the end of President Aquino’s term in 2016. Aquino has a keen personal interest in military equipment and has thus provided an important impetus for greater defence resource allocation. A less enthusisatic President could translate into decreased defence spending and derail AFP modernisation.

The AFP also appears to want to diversify the capabilities of its prospective assets. It has sought to cast equipment acquisitions such as the AW109 PN Multipurpose Helicopter purchase, the Bell 412 Combat Utility Helicopter, and the Strategic Sealift Vessel as multi-use platforms.

As was demonstrated by the long lead-up to the signing of the FA-50 contract, there is more political resistance to equipment acquisitions that are primarily framed for warfighting. The apparent preference for multi-role assets is also understandable given the myriad of non-hostile military operations undertaken by the AFP such as disaster relief. But it must be stressed that such tasks act as a distraction from fully transitoning the AFP to external defence. Military involvement in duties other than warfighting are  are symptomatic of the Philippines’ overall lack of civilian civil defence capability, specifically disaster search and rescue, and relief operations.

Given the fiscal and political context of the Philippines’ military modernisation, China’s concerns over the purported destabilising effect of Philippine modernisation appear to be unwarranted. While it is true that the purchases will likely complicate any expansionist move by Beijing, Manila’s purchases have remained consistent with its goal of obtaining a ‘minimal credible defence posture’. Territorial claims are best enforced through less belligerent acts, and having a presence in contested waters is still more important than sheer offensive capability. The Philippine government seems to have learnt its lesson from China’s de facto occupation of Scarborough and will seek to deny Beijing a pretext to take over Ayungin Shoal.

Manila could leverage a heavy-handed Chinese response, even by non-military assets, to its advantage. On 30 March 2014, a resupply mission to Ayungin Shoal—fully covered by the media—was used to underscore the narrative of a seemingly David and Goliath struggle between Manila and Beijing. But aside from a concerted PR push, Manila has also been pushing at the diplomatic front. In short, Manila seemed to have recognised the asymmetrical options it has at its disposal.

For now, as paradoxical as it may sound, the combination of a more cautious, albeit still assertive China, and a more credible Philippines may allow tensions in the South China Sea to simmer down. 

Joseph Franco is an Associate Research Fellow from the S Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

Categories: Forum

Is the glass half full or half empty in Malaysia?

East Asia Forum - Fri, 04/18/2014 - 05:00

Author: Nurhisham Hussein, Malaysia

There is a stark divide between perception and reality when it comes to the Malaysian economy. According to official statistics, the Malaysian economy grew 4.7 per cent in 2013, down from the 5.6 per cent recorded in 2012.

Despite the lower number, GDP growth throughout 2013 accelerated, rising from 4.1 per cent in the first quarter to 5.1 per cent in the last quarter.

These are by no means bad growth figures. Given the slowing increase in the labour force over the past few decades, Malaysia’s potential for economic growth has been naturally declining. A growth rate averaging above 5 per cent for the last two years is in fact commendable, especially since Malaysia’s neighbours are doing considerably worse, relatively speaking.

But there remains a startling pessimism regarding the state of the Malaysian economy, a pessimism that transcends concerns over the cost of living, unemployment or income growth. This seems hard to account for. The economy has grown, and grown in a fairly robust manner. Real GDP growth in South Korea, Taiwan, Thailand and Hong Kong all averaged or exceeded 4 per cent between 2001 and 2010 with Singapore averaging above 5.5 per cent; Malaysia meanwhile saw growth around 4.6 per cent. Since then, average growth for the above economies was 2.9 per cent, 2.5 per cent, 3.2 per cent, 3.1 per cent, and 3.3 per cent, respectively. Malaysia by contrast averaged over 5 per cent during this time.

After the initial recovery from the global recession of 2008–09, global trade growth levelled off. Countries that were most dependent on global trade saw their economic expansion slowed. Yet in the Malaysian case that barely occurred, despite being one of the most highly exposed and open economies in the world. What explains this gravity-defying performance?

Whatever one might think of the virtues or faults of the government’s Economic Transformation Programme (ETP), it deserves the credit for Malaysia’s buoyancy. By fostering an environment conducive to investment, Malaysia saw a sudden sharp increase in capital investment, both public and private. While the infrastructure projects under the ETP hogged the limelight, private investment increased sharply as well, particularly in 2012. There’s no doubt that the resulting investment boom helped support economic growth even as external demand remained subdued.

Yet this apparent success was not broad-based. Growth was primarily concentrated in construction and its related sectors. While one could argue that investment in infrastructure such as the Mass Rapid Transit project was necessary and long overdue, there was also an accompanying boom in commercial property construction. The manufacturing sector, however, suffered from flat exports, while the primary sectors were affected by both slowing demand and softer commodity prices.

So, on the one hand, the benefits of Malaysia’s recent growth have been narrowly distributed while, on the other, risks to the economy are increased from potential over-investment in a single sub-sector.

Not that this is unusual for Malaysia. Growth in the 1990s was focused in manufacturing and construction, with the primary sector declining. Similarly, growth in the 2000s (pre-2008) saw the return of agriculture and mining, outshining growth in both manufacturing and construction as a global commodity price boom helped drive up incomes in those sectors.

The Malaysian economy is thus fairly diversified, with multiple sources of growth. This will help sustain aggregate income growth even when particular sectors are not doing so well. But in turn, it means the distribution of the benefits of that growth can and will be uneven at any given point in time.

Over the last few years, construction and real estate have been significant drivers of growth. With the recovery in the US and other advanced economies now taking root, manufacturing looks set to join the party. But the ongoing growth slowdown in China and India has affected demand and prices for primary commodities, and the outlook for the palm oil and the oil and gas sectors is not strong.

Perceptions of the state of the Malaysian economy therefore really depend on who you’re asking, and when.

Nurhisham Hussein is a Malaysian economist.


Categories: Forum

How Indonesian local governments spend too much on themselves

East Asia Forum - Thu, 04/17/2014 - 17:00

 Authors: Günther Schulze and Bambang Suharnoko Sjahrir

Indonesian districts spend excessively on their own administration — money that could be spent on delivering public services for the people. The key problem is that democratic accountability is not (yet) sufficiently effective. After the 2001 decentralisation the districts, the third tier of government after center and provinces, are responsible for the provision of basic services such as health, education, and infrastructure and spend around a third of the consolidated government budget. They are therefore important providers of public goods and services, especially for the poor.

On average around 30 per cent of district budgets are absorbed by expenses for district administration, of which 85 per cent go to general government administration and the rest to other administrative functions, such as development planning, unity and local politics, or people and village empowerment (but not to sector administrations such as health or school administrations). This level is excessive by all international standards: administrative spending is double the districts’ average allocation for infrastructure (15 per cent) and the second-biggest budget item after education (34 per cent).

These high levels of administrative spending are persistent: even though Indonesia’s district budgets doubled between 2001–07, and have steeply increased thereafter, the share of administrative spending has declined only slightly since 2005. In absolute terms administrative spending per capita has sharply increased, which is remarkable since many spending items in this category have a strong fixed cost component. For instance, the expenditures for bupatis’ (regent) offices or for travel expenditures should increase only slightly with rising budget levels.

What explains these persistently excessive levels of administrative spending?

A recent study analyses this issue using data for 399 districts over the time period 2001–09. One line of explanation could be the emergence of new districts (pemekaran) and the need to establish new administrations. Yet, the evidence shows that the splitting of districts is not the reason for high spending levels. Newly created districts do not spend more per capita on administration during the start-up phase, only the composition of administrative expenditure is different. New districts have a higher share of capital expenditure and a lower share of staff expenditure as they still have to build up physical infrastructure and hire personnel.

A prime explanation is bureaucratic self-interest and a lack of accountability. Bureaucrats and local politicians profit from larger offices — both literally and in terms of the number of people employed — and from bigger budgets as they provide more convenience and more possibilities to employ family members or to accommodate the wishes of key allies and constituencies. This is true for all bureaus of the district government, but since a district’s central bureau is politically more powerful than the others it has better opportunities to lobby for big budgets and thus a greater propensity towards wasteful spending.

This administrative overspending is a wasteful activity as it directs funds away from the provision of public services towards uses that benefit the bureaucrats and politicians in power, but not the people. As such it constitutes a form of ‘legal corruption’ (the World Bank defines corruption as ‘misuse of public office for private gain’). Such waste can be avoided if governments are held accountable.

Decentralisation in Indonesia in 2001 replaced bureaucratic accountability to the central government with democratic accountability to the local electorate. If democratic accountability works at the local level, increasing democratisation should rein in the excessive administrative spending.

Two distinct steps towards more democratisation have taken place in Indonesia: the elections of district heads by the democratically elected local parliaments, and subsequently the direct elections of district heads by the local electorate. The incumbent district heads that had been  appointed under Suharto  were allowed to serve their full terms, which came to an end at different points in time. As a consequence, both steps took place at different times across the districts, making it easy to identify the increase in democratic circumstances. The study uses this circumstance to analyse whether democratisation has any impact on the size of administrative spending.Unfortunately, both democratisation steps did little to reduce the misallocation of resources.

Local party composition influences the extent of administrative overspending. In the sample of districts that did not split, for which the study has consistent data on local parliaments’ compositions, it finds that in districts with high political concentration or a dominant party, administrative overspending was even larger. In other words, political competition reduces the degree of waste.

These findings show that district governments are still not sufficiently accountable to the local constituency. Greater accountability would rein in excessive spending on themselves for the benefit of the people they are obliged to serve.

As such, decentralisation and democratisation at the local level are alone not sufficient for eliminating wasteful administration expenditure. Reform that improves political competition, including by increasing the transparency of the political process and making it easy for outsiders to run for office, is likely to be essential. Sensible next steps should include abolishing all barriers to entry for candidates to run for office of district head. This may lead to higher competitiveness of the political process, more freedom to choose, and thus better outcomes.

Dr. Günther G. Schulze is Professor of Economics at the Department of Economics, University of Freiburg, Germany.

Bambang Suharnoko Sjahrir is is a PhD student in the same department and works for the World Bank in Indonesia.

The views expressed in this article are those of the authors and do not necessarily reflect the views of the institutions they are affiliated with.

Categories: Forum

Why China stands to benefit from ambiguity on Crimea

East Asia Forum - Thu, 04/17/2014 - 05:00

Author: Maria Repnikova, Asan Institute for Policy Studies and Georgetown University

From the outset of the Russia–Ukraine escalation, Russian official sources claimed to have secured China’s support. Most recently, following Russia’s official annexation of Crimea, President Vladimir Putin thanked China and India, which abstained from the UN Security Council vote condemning Russia.

In reality, however, Russia’s projection of China’s stance in this crisis has been misconstrued, as China consistently favoured strategic ambiguity instead of directly championing Russia’s cause. In March 2014 Wang Yi, China’s foreign minister, stated that China would not consider taking sides in this conflict. China’s abstention in the Security Council vote validated this statement. Most recently, during his visit to Europe, President Xi stressed that China is in favour of ‘political solutions to the crisis’ that would benefit all parties involved, voicing strong support for international coordination mechanisms.

As the crisis unfolded Chinese media expressed some implicit support for Russia by criticising the West for its hypocrisy in fighting for Ukraine’s sovereignty while having partaken in an anti-democratic revolt against President Yanukovych. A popular article wrote that while the Chinese government wants to maintain a diplomatic equilibrium, Chinese public opinion strongly supports Russia, regarding its actions as legitimate in light of Western containment policies. Neither the official press nor popular nationalistic outlets, however, have directly praised Russia’s invasion of Crimea. The latest tensions in Eastern Ukraine have been widely reported in Chinese press, but largely relying on Western news sources and abstaining from sharp commentary.

China has skilfully balanced its official support for a diplomatic solution to the crisis with projecting some affinity towards Russia’s position. This ambiguity benefits China’s foreign policy in many ways.

First, by staying in the middle China has managed to prevent significant rifts in its relations with the United States and Russia — two important partners. Both parties have used China’s ambivalence to advance their objectives in the crisis. The United States has used China’s abstention to stress Russia’s isolated position, while Russia presented it as a sign of support.

Second, China stands to gain in energy diplomacy as a result of closer ties with Russia. Being forced to look for gas export markets outside of Europe, it is increasingly more likely that Russia will sign the China Gas Deal, which has been stalled for many years. The 30-year deal to supply pipeline gas is timely as Chinese authorities are working to rebalance its national economy and establish reliable energy supplies. Signing the gas deal will also place China in a more confident negotiating position vis-à-vis other energy suppliers.

Third, the Crimea crisis is likely to increase China’s growing assertiveness in the Asia Pacific region. The Ukraine events distracted the United States from its pivot towards Asia, which is already perceived with wariness by Chinese officials and experts, and interpreted as largely reactive to China’s growing influence in the region. The Crimea crisis further highlights the weakness of the United States in managing multiple global objectives along with domestic challenges, giving more leverage to China in managing regional affairs.

Most importantly, the Crimea events taught China that unilateral actions could succeed. This has important implications for its potential confrontation with Japan, and also with Taiwan in the future. The inability of the West to stop Russia’s annexation of Ukraine demonstrates the weakness of the international community. The already vocal public opinion in China is further fuelled by Russia’s defiance of Western pressure. In future crises, the Chinese public will look to Russia as an example of leadership, making it harder for Chinese leaders to uphold a more diplomatic position. As the media attention focused on Ukraine, China has persisted in upholding its stance on contentious issues in the Asia Pacific. It gave stern warnings to the Philippines over disputed shoal, and continued to defend its ‘undisputable sovereignty’ over the Diaoyu/Senkaku islands.

The events in Crimea demonstrated to China that it pays off maintaining neutrality in international conflicts for as long as possible and to treat such crises as strategic lessons. China learned that assertiveness can yield effective results, and the costs of international retribution remain relatively low. How it incorporates these lessons into its foreign policy is something to watch closely in the future.

Maria Repnikova is a post-doctoral fellow at the Asan Institute for Policy Studies and a visiting scholar at the Government Department, Georgetown University. You can follow her on Twitter @MariaRepnikova

Categories: Forum

Modi and manifesto set sky-high expectations

East Asia Forum - Wed, 04/16/2014 - 17:00

Author: Rajiv Kumar, Centre for Policy Research

The manifestos that have been made in the run-up to the Lok Sabha elections are trying to please everyone. One has to read between the lines to truly appreciate the nuances and identify the differences.

Take for example the issue of fiscal discipline. Both the Indian National Congress party and the BJP have sworn to maintain fiscal discipline. But both parties do not give us an idea of how this fiscal discipline will be achieved and any timeframe for doing so. These examples are infinite. These long and densely written documents are also clearly not reader-friendly — perhaps to blur accountability.

The BJP manifesto attempts to be inspiring by talking of Shreshtha Bharat (Great India) and positing an India that works towards commanding rather than demanding its rightful place in the comity of nations and a place at the high table of global governance. This is in stark contrast to the Congress’ manifesto which posits no such aspirations and continues with its focus on entitlements as the only remedy. But it would have surely been more credible for the BJP to spell out the trajectory of economic growth and the principal drivers for achieving Shreshtha Bharat.

Still, the commendable feature of the BJP’s manifesto is its emphasis on economic growth; employment; raising the rate of domestic savings; improving the business environment for investors, including SMEs; raising R&D expenditures; and strengthening both social and physical infrastructure. By sticking their colours to the mast of growth and employment, the BJP has rightly sought to distinguish itself from the Congress’ tiresome focus on entitlements and handouts. It would have been even better if the manifesto had declared the BJP’s intention to steer the public away from market-distorting subsidies and handouts. This would have allowed it to distinguish its stance as promoting empowerment — not the debilitating culture of entitlements propagated by the Congress.

The youth of India, to which the manifesto makes a special appeal, desperately want to be empowered with employable skills and career-advancing education.

In this regard, the BJP’s detailed treatment of education infrastructure, skill creation by using Massive Open Online Courses, emphasising the need for large-scale teacher training programs, restructuring the University Grants Commission into the Higher Education Commission, and setting up a national E-Library, are all spot on. The manifesto would have greater appeal if it had promised to extend the facilities and provisions of the National Democratic Alliance’s own Sarva Siksha Abhiyan (The Education for All Movement) up to the 12th grade for girls.

This one measure would help achieve several positive outcomes, like pushing back the marriage and childbearing age for girls, making them more employable and hence empowered — improving gender equality. The BJP (if they come to power) should consider the implementation of this measure within the first 100 days of taking office. The absence of any mention of setting up community colleges and of the role of foreign universities in bringing in investment, technology and modern pedagogical methods to India’s education system is puzzling.

The BJP’s opposition to FDI in multi-brand retail, omission of foreign universities’ role, lack of spelling out the higher level of FDI in defence production, and the absence of financial sector reform to facilitate the entry of foreign entities, does not bode well. Especially when taken together with statements such as ‘we should no longer remain a market for the global industry’. It perhaps reflects the presence of some xenophobic and protectionist tendencies, which have unfortunately been an integral part of the BJP ideological package. That would indeed be a pity for a party that professes to portray a confident India and who ‘… believe[s] that Indian entrepreneurs have the capability to take on global markets’. With such globally competitive firms and professionals, India should become much more open and confident in interacting with the world — and use it for serving their national interest, as China has demonstrated can be done.

There are some specific assurances in the manifesto and hopefully the BJP will deliver on these. Some of these are: speedy and focused efforts to bring back black money stashed abroad; forming a ‘Team India’ with the participation of the Central Cabinet and State Chief Ministers; reviving and rejuvenating the moribund Inter-State Council and the National Development Council for Team India to become effective; allowing a greater role to state governments in foreign policy and in developing their relations with neighbouring countries; greater focus on delivery in government departments; rolling out a comprehensive strategy for bringing India’s police force on par with international standards; eliminating manual scavenging within a specified timeframe; rationalising and simplifying the tax structure without succumbing to heroic schemes like the bank transactions tax or eliminating direct taxes for those earning up to Rs. 10 lakh (about US$22,500); implementing the GST and other measures for creating a single national market in the country; and establishing a well-functioning single window clearance mechanism for both domestic and foreign investors.

Like all these documents, the BJP manifesto will perhaps not make much impact on the party’s electoral prospects. The manifesto, as it is drafted, adds to the Modi appeal of credible, clean, transparent and effective governance. That is the key feature of the Modi campaign and also of the manifesto. This is as it should be. The electorate, if it does vote for the BJP in numbers that opinion polls have been revealing, will do so principally because they desperately need a government that works and delivers. That will be the acid test for the new government. Modi has raised the country’s expectations sky-high on this count — the hope is that he will deliver.

Rajiv Kumar is Senior Fellow Centre for Policy Research, New Delhi, and former Director of the Indian Council for Research on International Economic Relations.

A version of this article first appeared here in India Today.

Categories: Forum

Reforms vital for Vietnamese economy to stay on track

East Asia Forum - Wed, 04/16/2014 - 05:00

Author: Suiwah Leung, ANU

After several years of macroeconomic turmoil, 2013 finally saw a return to some semblance of stability in the Vietnamese economy. There is no time to lose.

The government needs to push through significant reforms in key areas in order to lift long-term growth.

Macroeconomic aggregates have been mixed. Headline inflation averaged 6.7 per cent, due partly to subdued credit growth and an easing of food prices. Core inflation (excluding food and energy costs) stood at 10 per cent, after increases in a number of administrative prices, such as education and health costs. Core inflation is expected to continue declining this year and next due to below-trend growth.

Strong performance in both exports and remittances saw Vietnam’s current account record a surplus of 5.9 per cent of GDP in 2012, and an estimated surplus again of 5.1 per cent in 2013. As a result, pressure on the dong has eased, and the official and black market exchange rates have converged. But overall GDP growth is at a sub-trend 5.3 per cent in 2013, rising to a forecast rate of 5.5 per cent by 2015.

There is now clear evidence that Vietnam has climbed on to the production network in electronics and accessories, mobile phones and parts, computers, and automobile parts. Export of mobile phones and parts is estimated to have reached US$18 billion in the first 10 months of 2013, surpassing even garment exports. This is the result of significant foreign direct investment over the past five years by multinationals such as Intel, Samsung and Nokia. Samsung has been the outstanding export performer so far, and Vietnam risks over-reliance on one company.

Nevertheless, all these multinationals have linked Vietnamese manufacturing to the global production-sharing supply chains and transformed the composition of its export basket. Export of electronics, mobile phones and accessories grew from less than 4 per cent of total exports in 2003 to more than 32 per cent 10 years later. At the same time, traditional labour-intensive manufacturing has also done well, averaging growth of more than 17 per cent in 2013, with garment exports growing at 18.5 per cent.

Industrial policy is once again fashionable. It is claimed, however, that the new focus is not on ‘picking winners’ but on developing an enabling environment for industries and firms to move into new products and into higher value-added activities within existing product lines. While there is certainly a role for trade facilitation in promoting industrialisation and growth in Vietnam, what will bring higher long-term growth are reforms in state-owned enterprises (SOEs), bank restructuring, and improved public finance and administration.

The costs of doing business — including but not limited to wages — must be kept competitive. These include the costs of telecommunications, insurance, electricity, gasoline, shipping and customs facilities, rentals for offices and expatriate personnel accommodation. But most of these areas are dominated by SOEs. Hence, the progress of SOE reforms will have a profound impact on the competitiveness of all Vietnamese firms.

In the garment industry, where the lack of domestic supply of both quantity and quality textiles is identified as one of the major constraints to development, SOE presence is still as high as 21 per cent. Removing state firms from activities that are purely in the private domain will help to develop backward linkages, enhancing flexibility in catering to changes in international consumer tastes, and reducing the reliance on imported textiles and fabrics. Finally, in the large conglomerates of state enterprise groups and general corporations, involvement in non-core activities such as real estate, insurance and banking raises the risks of contingent liability and fiscal bailouts.

Progress in reform is slower than expected, despite a number of decisions made during 2013 about the disclosure of financial and non-financial information, linking SOE manager remuneration with performance, and removing the requirement to sell state assets at least at book value. Current legislation is not clear about what information is to be disclosed, and to whom.  The question of what to disclose is supposed to be addressed in Decree 61 to be implemented in 2014, but inter-agency coordination is lacking and needs to be resolved.

Case studies of the garment, footwear and electronics industries have all found that lack of finance is a constraint to small and medium enterprises (SMEs) and start-ups. In the case of Vietnam, simply removing the regulation forcing banks to lend (allegedly for prudential reasons) only to firms with a proven past history of operations would open the way for funding start-ups. This is not to say that bank managers necessarily have the skills or the risk preference for lending to start-ups and SMEs, particularly when they can make more profitable and secure loans to SOEs. But building a strong and commercially oriented banking sector by implementing the reforms that are already in the government’s plans would encourage bank lending to all productive enterprises, including SMEs.

Here again, progress needs to be accelerated. The issue of non-performing loans (NPLs) continues to undermine confidence in the banking sector and hinder credit growth. Moody’s estimate in February 2014 of NPLs at 15 per cent of banking assets raised serious questions regarding the official estimates by the State Bank (SBV) of 4.6 per cent last October, and an even lower estimate of 3.6 per cent at the start of February 2014. The subsequent statement on the SBV website of a NPL ratio of 9 per cent if more stringent definitions were used, was in fact an admission of regulatory forebearance on the part of the SBV. One of the problems is ‘gaming behaviour’ on the part of some commercial banks which purchase bonds from their corporate borrowers so that those companies can use the funds to reduce their NPLs with the banks. Some banks over-value collaterals to minimise provisions for NPLs. The recent Decision 843 is supposed to give the State Bank more power in auditing commercial banks’ NPLs, but the credibility of the SBV itself needs to be re-established first.

The setting up of the Vietnam Asset Management Company (VAMC) in July 2013 is generally viewed as another way of getting NPLs off the books of commercial banks. Whether the VAMC can resolve the NPL issue in due course depends importantly on the amount of capital that it is able to raise. Meanwhile, more relaxed foreign bank ownership rules should help strengthen the banking sector and make it more commercially viable.

In addition, improved government finance is necessary for investments in infrastructure and human resources — essential ingredients for long-term growth.

In short, continued stability on the macroeconomic front, together with impressive growth in manufacturing exports, indicates that the medium-term prospect for Vietnam has improved somewhat in the past 12 months, albeit with significant downside risks. Time is of the essence. Providing the government can ,move on with SOE reforms and bank restructuring while maintaining fiscal discipline — and providing that the world economy remains in an upward trajectory — it is still possible for Vietnam to succeed in lifting its longer-term growth.

Suiwah Leung is an Adjunct Associate Professor of Economics at the Crawford School of Public Policy, ANU.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘On the Edge in Asia’.

Categories: Forum

Peering into Thailand’s turbulent future

East Asia Forum - Tue, 04/15/2014 - 17:00

Authors: Pasuk Phongpaichit, Chulalongkorn University, and Chris Baker, Bangkok

The courts may shortly remove Thailand’s prime minister, Yingluck Shinawatra.

This would mean that in the past eight years, four prime ministers have been felled and four election results voided — surely a world record.

Behind this turbulence is major social change. Over one generation, average real per capita income tripled. The impact was greatest in the lower half of society. Many migrated for work, becoming aware of the great inequities in Thai society. Remittances flowing back to the village were invested in new urban-style lifestyles and consumption patterns — including access to the world through satellite and internet. Values and aspirations changed in parallel. People began to demand a fairer share of public goods like healthcare and education, and equal benefits. From around 2000, they discovered the power of the vote to realise these aims.

Thailand’s old political institutions — the bureaucracy, military and monarchy — were rattled because they had never faced such assertiveness before. They have won support from an urban middle class nervous about being a minority in an electoral democracy, and reluctant to see their taxes used to share national resources more equitably.

This classic social clash has been complicated by personalities. Thaksin Shinawatra, the first politician to respond to the upsurge from below, lacked any ethical hesitation about using power to increase his personal wealth. The moral aura of the monarch, King Bhumibol Adulyadej, enhanced by his seniority and the length of his reign, was invoked as a counter to the power of popular politicians.

The establishment tried to get rid of Thaksin by a coup in 2006. This classic manoeuvre failed because of the social forces behind him. Thaksin’s party rose from the ashes after two dissolutions. The electorate supported him through three more polls. And from exile, Thaksin continued to rally his supporters through new electronic media.

The establishment then changed the rules of politics — reducing the power of the parliament and executive, reviving the political role of the military, and handing a new role to the judiciary. But this again did not fully work, and a Thaksinite party swept back to power in 2011.

Opponents immediately began trying to bring this Yingluck government down — seeking a moratorium on parliament while the rules were changed yet again. Thaksin’s opponents argue that simple electoral democracy has to be qualified to prevent abuse of power — best done by strengthening old institutions, privileges and hierarchies.

Against them, the pro-Thaksin Red Shirts want to protect electoral democracy as a means to do away with those old privileges and hierarchies.

The present phase of protest began in November 2013 after a botched attempt to pass an amnesty bill that would have whitewashed Thaksin, and enabled him to return to Thailand. At first this protest was different from earlier phases. Young office workers mobilised over social media and assembled in mobs over lunch hour or on weekends at hubs of Bangkok’s mass transit system. Their anger was focussed on Thaksin’s manipulation of the parliament for personal ends.

Within weeks, the opposition Democrat Party muscled into the protests’ leadership, changed its aim to overthrowing the government, set up elaborate protest venues at very high expense, and disrupted a general election. The young protesters melted away, leaving a sparse crowd dominated by supporters from the Democrat stronghold in the south and 4000 ‘guards’ paid USD$15 a day.

The protesters called on the army or the palace to remove the government. The palace kept its silence. The army chief bluntly refused. He explained that the 2006 coup had not really ‘worked’, and was clearly sensitive about international censure.

The opposition turned to the judiciary as an alternative mechanism. Ten years ago, Thailand’s judiciary had a negligible political role. Now the judges topple governments, remove ministers, void elections, and issue instructions to governments on what they can and cannot do.

What happens next is far from clear. In the short term, judicial rulings will probably bring down the government, followed by a new election and a package of reforms. Reforms may include changes in the form of elections, improved mechanisms for monitoring the budget, and a reconstituted senate.

Over the longer term, the forces in play will not remain static. Thaksin can probably never return to an active political role. Yingluck may also be neutralised, and the family has no other promising candidates. A succession in the monarchy is looming. So, with a change in personalities, the pieces of the political jigsaw will start to shift.

The social and economic changes underlying politics will continue. The fastest growing areas are now outside the capital, particularly in the north and northeast. Upper secondary and tertiary education will expand in the provinces. Media will continue to develop, while decentralisation also advances.

All these trends will tend to strengthen the forces pressing for a redistribution of social and economic power. The establishment resisting these changes will ultimately be obliged to compromise — and the political system will catch up with economic and social change.

Pasuk Phongpaichit is Professor of Economics at Chulalongkorn University, Bangkok.

Chris Baker is a historian and prominent Thailand scholar.

Categories: Forum

Japan and Australia ‘beef up’ relations

East Asia Forum - Tue, 04/15/2014 - 05:00

Author: Aurelia George Mulgan, UNSW Canberra

The Economic Partnership Agreement that Japan recently signed with Australia (JAEPA) has everything to do with Japanese trade strategy and little if anything to do with agricultural reform.

Some of the commentary on the agreement has argued that JAEPA was the product of Abe’s reform agenda, but it is neither part of that agenda nor will it advance it. Other factors were at stake — chiefly relating to Abe’s trade strategy.

The big push factor for Japan was the TPP and the ongoing bilateral negotiations with the United States on agricultural market access. Nobutaka Ishida, researcher at Norinchukin Research Institute, refers to Japan’s ‘ulterior motive of gaining an advantage in the TPP negotiations by concluding the Japan–Australia EPA’. This was the ulterior motive Prime Minister Abe had in sending his TPP Affairs Committee Chairman, Koya Nishikawa, to Australia in the days leading up to Prime Minister Abbott’s visit to Tokyo. His job was to gauge how serious the Australian government was in its endeavor to conclude a trade agreement with Japan in the short term.

The concessions offered to Australia in JAEPA were designed to act as an alternative ‘model’ for dealing with farm commodities that Japan has nominated as exemptions from tariff abolition in the TPP (rice, wheat, beef and pork, dairy products and sugar). Under this model Japan rejects the principle of zero tariffs (the TPP and US template) but agrees to small, quantitative increases in imports by means of staged reductions in tariffs over one to two decades. This is what Australia achieved on beef, and in varying degrees on processed cheese, high polarity sugars and pork. However, these limited concessions were not replicated on other ‘sensitive products’ such as rice, other sugars, wheat, butter, fresh cheese and skim milk powder. Australia was pressing for better market access, but these products were excluded from the agreement.

Even beef was subject to safeguard provisions. The fine print in JAEPA reveals that if imports exceed certain quantities, tariffs on imports will immediately revert to the existing level (38.5 per cent). In the first year after JAEPA comes into effect, the tariff will be increased to this level if import volumes exceed 130,000 tonnes for chilled beef and 195,000 tonnes for frozen beef. This amount will be increased over 10 years. The Nikkei reports a government source as saying that the aim of combining an apparently bold concession on beef with safeguard provisions was to ‘save Australia’s face and achieve results’. Norinchukin Research Institute’s Ishida admits that ‘Japan went no further than essentially to implement a tariff rate quota for beef’.

Japan wants the United States to accept this restricted model of agricultural trade liberalisation in the TPP. Minister for Economic and Fiscal Policy Akira Amari is believed to have proposed lowering the tariffs on US beef instead of removing them — similar to the agreement on Australian beef in JAEPA. As an additional incentive, JAEPA gives Australia an immediate advantage over US exporters (a tariff advantage of 8 percentage points in the first year on frozen beef and 6 percentage points on chilled beef). Under these conditions, the United States will lose market share, and the longer it holds out for better access in the TPP, the more its beef exporters will suffer relative to their Australian counterparts. During the negotiation phase prior to Prime Minister Abbott’s visit to Tokyo last week, Japan’s Minister of Agriculture Yoshimasa Hayashi told Australia’s Minister for Trade and Investment Andrew Robb that ‘[Australian beef] will be given a great advantage in the Japanese market compared to American beef’.

The aim was to pressure the United States to compromise.

In this Japanese trade strategy, JAEPA puts America between a rock and a hard place: either accept some version of the Japan model of agricultural market opening or face the prospect of a TPP without Japan — which USTR Mike Froman has rejected. Japan’s ‘premium’ as a potential trading partner in the TPP has helped it to resist the United States’ considerable gaiatsu (external pressure) in the bilateral negotiations. America needs Japan in the TPP if it is to be a worthwhile enterprise economically, diplomatically and strategically for America’s Asia rebalance.

Japan, on the other hand, has at least two alternative trading agreements that it can use to advance its trade strategy in the East Asian region: the Regional Comprehensive Economic Partnership (RCEP) and the China–Japan–South Korea FTA, neither of which pose as great a threat to its protected agricultural sector and are more accepting of the principle of exemptions.

JAEPA also supports Japan’s use of trade strategy to complement its diplomatic and security strategy vis-à-vis China. During Abbott’s recent visit to Japan, there was talk of Japan and Australia ‘beefing up’ their special relationship and expanding their security partnership alongside the trade partnership, particularly in the area of defence cooperation. This continues the approach that Prime Minister Abe adopted in his previous administration in 2006–07 when he oversaw a subtle shift from exclusive bilateralism to modest minilateralism. The shift reflected his desire to take independent steps to shore up Japan’s security with key partners such as Australia and India.

The absence of an agricultural reform dimension from JAEPA shows Japan’s apparently successful defence of its ‘sacred’ areas from a market-opening onslaught. Dairy beef will be slightly affected by the tariff reductions but even here the impact will be muted by the availability of tariff revenue to fund compensation for dairy cattle farmers. No other areas of Australia’s increased agricultural market access to Japan pose a threat to domestic producers. For this reason, JAEPA cannot be considered as progress on structural reform, the ‘third arrow’ of Abenomics.

The response to JAEPA from Japan’s anti-TPP agricultural cooperative organisation (JA) has been ‘understanding’. JA-Zenchu Chairman Akira Banzai expressed his appreciation for the ‘hard work’ that MAFF Minister Hayashi and other government officials undertook in the negotiations and in achieving as much as they could based on Diet resolutions that demanded that tariffs on ‘sensitive products’ such as beef be exempted from abolition and reduction.

The Japanese government appears committed to a natural process of structural adjustment in the agricultural sector over some decades — not market- or trade-driven. It will be driven by the ageing of the farming population resulting in farm amalgamations as retiring farmers exit the industry, with some government-sanctioned institutional and financial assistance.

Aurelia George Mulgan is Professor at the University of New South Wales, Canberra.

Categories: Forum

Can Pakistan free itself from polio?

East Asia Forum - Mon, 04/14/2014 - 17:00

Author: Sanchita Bhattacharya, Institute for Conflict Management

In February this year, Pakistan’s ambassador Masood Khan told a UN panel that his country, under Nawaz Sharif, hopes to eradicate polio in 2014. How realistic is this goal?

There are only three countries where the polio virus (officially, poliomyelitis) remains endemic: Afghanistan, Nigeria and Pakistan. In comparison to Pakistan, elsewhere in the subcontinent, India was removed from the WHO list of endemic countries in 2012, and Bangladesh, following a 2006 outbreak, is now also considered polio free.

There are numerous conditions that make eradicating polio from Pakistan difficult: Pakistan’s weak state and health system, particularly in the tribal areas; ongoing conflict in the region, including drone strikes; prejudices among the population against the polio vaccine; and backlash against the use of health campaigns by security and intelligence agencies. All these factors threaten the efficacy of Pakistan’s polio eradication efforts — and the people administering it.

Security remains a deep challenge for Pakistani society, and anti-polio efforts are no exception. On 11 March this year, two policemen guarding a polio vaccination team in Gandi Umar Khan village (about 25 kilometres from Dera Ismail Khan in Khyber Pakhtunkhwa province) were shot dead by armed men. And, according to reports, in 2013 there were 30 incidents of attack on polio workers in Pakistan.

Polio vaccination workers were targeted directly for the first time back in 2012. In December of that year, nine anti-polio workers were murdered by gunmen believed to be Pakistani Taliban, leading to a temporary suspension of the eradication program by the UN. And earlier in June 2012, the militant Taliban leaders of North and South Waziristan declared a ban on vaccinations until US drone strikes ceased. According to sources, around 54 people have been killed in such attacks since December 2012.

A key feature of the Taliban militancy is the systematic attack on people suspected of behaviour in violation of the Taliban’s interpretation of the principles of Islam. The Taliban have prohibited vaccination campaigns for children, school-age girls, and women working outside the home. According to sources, ‘[t]he militants, and other orthodox elements … say Allah alone decides about sickness or health and no one should interfere’.

But public confidence in the vaccination program is also low. In May 2012, expired polio vaccines were administered to about 3000 children, further deteriorating the already wavering trust in the vaccine program. In addition, suspicion about polio workers worsened after the 2011 US operation to kill Osama Bin Laden. In the aftermath, it emerged that the CIA had recruited a Pakistani doctor, Shakil Afridi, to organise a fake vaccination drive to try to obtain a DNA sample from the children living inside Bin Laden’s Abbottabad hideout.

But, in spite of all this, Pakistan has come a long way in its struggle to eradicate polio. In the early 1990s there was estimated to be more than 20,000 polio cases a year, now declined to an average of about 100 cases annually. And data suggests that, excluding the northwest’s Federally Administered Tribal Areas, a decrease of about 40 per cent occurred in 2013. So far, in 2014, there have been 43 cases.

Pakistan’s goal of eradicating polio this year, as declared by Ambassador Masood Khan in February, will be difficult but not impossible. The declining frequency of polio incidents in Pakistan over time provides promising evidence that the country might be progressing towards eradication of the disease in the near future. Khan noted that, ‘[t]o accomplish this mission, the Prime Minister has created a Polio Eradication Cell in his office and has designated a focal point to coordinate actions between the federal, provincial and local governments’. And ‘[d]espite security challenges, our valiant polio workers continue to perform their tasks with devotion and dedication’, he added.

But complete eradication will require a more stable security environment, especially one that has curtailed terror activities in the country. An all-encompassing strategy must also be developed, along with cooperation from the community-based religious clerics for better mass support and participation in the polio immunisation program.

Dr Sanchita Bhattacharya is a New Delhi based researcher working on Political Islam in the Indian Sub-continent. Currently she is working as Research Associate for the Institute for Conflict Management.

Categories: Forum

Lifting Asia out of poverty needs to be done equally

East Asia Forum - Mon, 04/14/2014 - 05:00

Author: Juzhong Zhuang, Asian Development Bank

Developing-Asia’s impressive growth continues but faces a new challenge — inequality is on the rise. Over the last few decades, the region has lifted people out of poverty at an unprecedented rate. But more recent experience contrasts with the ‘growth with equity’ story that characterised the newly industrialised economies’ transformation in the 1960s and 1970s.

Treating developing Asia as a single unit, its Gini coefficient of per capita consumption expenditure — a commonly used measure of inequality — worsened from 39 in the early 1990s to 46 in the late 2000s. It worsened from 32 to 43 in China, from 33 to 37 in India, and from 29 to 39 in Indonesia. Inequality widened in 12 of the 28 economies with comparable data — and these 12 countries account for over 80 per cent of developing-Asia’s population.

High and rising inequality can curb long-term growth because it leads to a waste of human capital, reduces social cohesion, hollows out the middle class, undermines the quality of governance, and increases pressure for inefficient populist policies. Recent simulation analysis by the Asian development bank (ADB) shows that if inequality had remained stable in the Asian economies where it increased, the same growth in 1990–2010 would have taken about 240 million more people out of poverty — equivalent to 6.5 per cent of developing-Asia’s population in 2010.

This is why Asian policymakers are becoming more concerned about inequality.

This concern is increasingly being addressed through medium-term development plans across the region — such as in China, India, Indonesia, Malaysia and the Philippines — that include explicit goals to make growth more inclusive.

Technological progress, globalisation and market-oriented reforms have been the key drivers of developing Asia’s rapid growth in the last two decades, but they have also had huge distributional consequences. These forces have opened enormous new opportunities for economies to prosper but have not benefited all people equally. Together, they have affected income distribution through three channels: capital, skill and spatial bias.

The bias towards physical capital reduces labour’s share of national income, while increasing the income share of the owners of capital. Similarly, the heightened demand for better skilled workers raises the premium on their earnings. And spatial disparities are becoming more acute: locations with superior infrastructure, market access and scale economies — such as urban centres and coastal areas — are better able to benefit from changing circumstances.

Inequalities between rural and urban areas and across provinces and states have increased significantly in many Asian countries during the last two decades. According to the ADB, in the late 2000s, about 25−50 per cent of total inequality can be explained by spatial inequality (urban-rural and inter-province inequalities combined) in countries such as China, India and Indonesia.

Between the mid-1990s and the mid-2000s, labour income as a share of manufacturing output in the formal sector fell from 48 to 42 per cent in China and from 37 to 22 per cent in India. Since capital is less equally distributed, this has contributed to rising inequality.

The share of inequality accounted for by differences in education attainment increased in all Asian countries with available data between the 1990s and 2000s, with the increase most significant in China, from 8 per cent in 1995 to 27 per cent in 2007, followed by India, from 20 per cent in 1993 to 30 per cent in 2010.

Moreover, these distributional impacts have been compounded by unequal access to opportunity due to institutional weaknesses and social exclusion. Unequal access to public services, especially education and health, is central to inequality of opportunity. And inequality of opportunity is a crucial factor in widening income inequality in developing Asia.

Household surveys show that school-age children from households in the poorest income quintile were three to five times more likely to be out of primary and secondary school than their peers in the richest quintile in some countries. Infant mortality rates among the poorest households were double or triple the rates among the richest households. High gender disparities in tertiary education also persist in South Asia and the Pacific.

The two forms of inequality — of opportunity and income — can lead to a vicious circle as unequal opportunity creates income disparity, which in turn leads to differences in opportunity for individuals and households.

How should Asian governments respond to rising inequality? Because the forces behind rising inequality — technological progress, globalisation and market-oriented reform — are also the engines of productivity and income growth, policymakers should not hinder their progress per se.

A distinction needs to be made between the income differences that arise as economies and individuals take advantage of the new opportunities of technology, trade and efficiency-enhancing reforms, and those that are generated by unequal access to market opportunities and public services. This latter source of inequality requires a policy response since it is magnified by the driving forces of growth, leads to inefficiency, and undermines the sustainability of growth.

Asian policymakers can consider four sets of policy responses to rising inequality in Asia: efficient fiscal policies to reduce inequality in human capital with a view to addressing the rising skill premium; interventions to reduce spatial inequality; policies to make growth more employment friendly with a view to increasing labour demand and hence labour’s share in national income; and measures to promote equal opportunities through strengthening governance and institutions.

The Asia Pacific has enjoyed a remarkable period of growth and poverty reduction, but the new global realities of technological progress, more globally integrated markets, and greater market orientation are magnifying the effects of inequalities in physical and human capital. Asian policymakers need to redouble their efforts to equalise opportunities in employment, education and health — to make growth more inclusive.

Juzhong Zhuang is Deputy Chief Economist of the Asian Development Bank.

This article is based on a new book, ‘Inequality in Asia and the Pacific’, edited by Riva Kanbur, Changyong Rhee and Juzhong Zhuang, to be published by Routledge in 2014.

Categories: Forum

Indonesia’s poll and presidency on a coalition course…and the Thais that bind

East Asia Forum - Sun, 04/13/2014 - 19:00

Author: Peter Drysdale, Editor, East Asia Forum

The election for Indonesia’s legislature last Wednesday represents another remarkable achievement in the country’s democratic transition. Indonesians proudly went to the polls and delivered a result that was without major incident and has not yet been disputed (though that may change when the official results are declared in a few weeks). The major opposition party, PDI-P — base of the Soekarnoist nationalists including Soekarno’s daughter, former president Megawati Sukarnoputri — came out ahead in the polls with Joko Widodo (widely known as Jokowi) as the lead candidate for the Indonesian presidency. The stage has been set for the presidential election in July, and it’s Jokowi’s to lose.

There were some surprises though. It appears at this stage that PDI-P has gained just under 19 per cent of the vote. The opinion polls were projecting that PDI-P might get between 21 to 24 per cent a week out from polling day. So there was noticeable disappointment and some recriminations within the PDI-P camp. The setback is important. Direct presidential nomination requires 20 per cent of seats in the parliament or 25 per cent of the vote, so Jokowi will need to form a coalition to take the next step.

PDI-P will try to align with the PKB (National Awakening Party) and PAN (the National Mandate Party). They are linked to the two largest moderate Islamic organisations, Nahdlatul Ulama and Muhammadiyah respectively. Collectively the vote for the Islamic parties is estimated to have risen from 26 per cent in 2009 to 32 per cent this election. A coalition with these two parties would position the ‘secular-nationalist’ PDI-P with the pluralist Muslim centre. But a coalition of the PDI-P with these smallish parties will not allow it to form a stable majority-government, despite their strong performance in the legislative election. For that, PDI-P will need the support of one of the medium-sized parties — Gerindra (Greater Indonesia Movement Party), Golkar or the Democratic Party. And that’s when Jokowi will need to learn how to play with the sharks. Golkar, led by Aburizal Bakrie, took around 15 per cent of the vote, not far behind Jokowi, and Prabowo Subianto’s Gerinda party had close to 12 per cent. The vote for President Susilo Bambang Yudhoyono’s Democratic Party was halved to around 10 per cent. Jokowi may, it’s been suggested, try to run a minority government, welding coalition on a case-by-case basis, though that would inject a great deal of uncertainty not only into the political but also the economic environment. There are certainly some sharks still at play in the pool.

But, declares Liam Gammon in this week’s lead on the Indonesian election results:

Make no mistake: Joko Widodo will almost certainly be the next president of Indonesia, notwithstanding PDI-P’s disappointing showing at this election. His closest rival in the presidential race, Prabowo Subianto, is running 30 points behind Jokowi in recent opinion polls. Certainly, the usual caveats about the pitfalls of survey research in Indonesia apply — especially given how much the legislative election results deviated from the surveys. But the truth of the situation is pretty self-evident: Jokowi has a huge lead, and it’s difficult to think of a scenario in which this changes that doesn’t involve a terrible political blunder or scandal.

As Gammon also says, come the inauguration of a Jokowi presidency in October, he will have to deal with political allies-of-convenience not commonly held principle. And they may not share his preoccupation with responding to public demands for greater social spending and attacking the corruption built into state budgets. Whatever the final coloration of the government, Jokowi may yet prove that it is possible in Indonesia to succeed politically from relatively humble origins and without recourse to corruption or manipulation.

The continued success of democratic transition in Indonesia is good news for the region and the world. Despite some disappointments with the Yudhoyono presidency, it saw Indonesia emerge on the world stage as a strong economy and with a confidence that restored coherence and direction to ASEAN’s regional centrality.

What can be expected of the new Indonesian presidency is still to unfold. Maintaining the momentum of strong economic growth and the entrenchment of social change will require bold new strategies. There is a worry that Indonesia might retreat from the challenge. Indonesia’s Southeast Asian neighbours look to Indonesian leadership to bed down the ASEAN Economic Community and East Asian regional initiatives in 2015. If Australia is hoping for a get out of jail free card with the new presidency, it had better think again. Australia is on the nose because of very bad calls by the Australian leadership on the Indonesian spying scandal and unjustifiable and offensive maritime border incursions. This is potentially a serious long-term problem that is not going to change unless fences are mended very publicly. For starters, Australia’s Prime Minister, Tony Abbott, should be the first world leader to line up to pay respects to Indonesia’s outgoing president and take a humble seat at celebrating the inauguration of its next in October.

…and the Thais that bind

Meanwhile in Thailand, the political situation goes from bad to worse. The decision by Thailand’s Constitutional Court to nullify the 2 February elections, as Thitinan Pongsudhirak points out this week, ‘has put the country on a collision course between those who advocate electoral democracy, even at the cost of corruption, and others who are bent on unelected rule based on what they see as virtuous moral authority’.

Prime Minister Yingluck’s days now do seem to be numbered. This looks like it will be the third time in recent history that a democratically elected government has been overthrown by the establishment. If what comes after her is a government that includes both sides of the divide, Thailand may be able to find a way through. But if it is a partisan anti-Thaksin interim government, in which Yingluck’s Pheu Thai Party is excluded from participation, there will be more turmoil and fractured politics which will sooner rather than later also begin to break the economy.

Peter Drysdale is Editor of the East Asia Forum.

Categories: Forum

No luck for Yingluck as Thai elections nullified

East Asia Forum - Sun, 04/13/2014 - 05:00

Author: Thitinan Pongsudhirak, Chulalongkorn University

The recent decision by Thailand’s Constitutional Court to nullify the 2 February elections has put the country on a collision course between those who advocate electoral democracy, even at the cost of corruption, and others who are bent on unelected rule based on what they see as virtuous moral authority.

The decision to void the election is part of a broader, concerted effort by Thailand’s opposition and watchdog agencies to dislodge the government of Prime Minister Yingluck Shinawatra from office. As opposing forces mount their battle plans, the protracted Thai crisis is becoming a tragic train wreck, spiralling in a political freefall that no one seems able to do much about. Sadly, the worst is to come before Thailand can start to pick up the pieces.

This round of the crisis began with the Yingluck government’s amnesty bill last October, allowing for the exoneration and return of her exiled brother, former Prime Minister Thaksin Shinawatra, who is under a two-year conviction for corruption. Thaksin’s controversial rule from 2001 until a military coup ousted him in 2006 yielded a mixed legacy. Establishment supporters loathed him as a corrupt usurper who manipulated the electoral system to line his own pockets, while rural citizens embraced his populist platform that addressed their neglected grievances, and ignored the corruption that went with it.

The amnesty bill broke an uneasy truce between Thaksin’s opponents and Yingluck, who went out of her way to appease the military, the Privy Council, and other establishment centres of power. It also sparked anti-Thaksin protests in Bangkok last November and the reformation of the anti-Thaksin coalition, which had been scattered and demoralised from electoral losses in recent years and from Yingluck’s apparent consolidation of power since winning the last election in July 2011. As the anti-Thaksin coalition gained traction through massive protests in the capital, led this time by veteran politician Suthep Thaugsuban of the opposition Democrat Party under the banner of the People’s Democratic Reform Committee (PDRC), Yingluck was forced to call an election on 9 December.

Even though Suthep succeeded in pressuring for a new poll, the Democrat Party boycotted the election. The PDRC obstructed some of the polling in Bangkok, and Democrat supporters in their southern strongholds ensured that polling yielded no clear results, including 28 constituencies without candidates. While polling in Yingluck’s Pheu Thai party heartlands in the north and northeast were completed, the south and Bangkok were problematic. The Election Commission — seen as part of the anti-Thaksin coalition — was unenthusiastic about staging the lower house polls from the outset. The lower house elections were inconclusive, and the necessary electoral reruns would have gone on for months.

However, the upper house polls on 30 March were in stark contrast. The Election Commission appeared more eager to hold the contest for Thailand’s 77 elected senators, who would be placed with another 73 appointed colleagues to comprise the upper house. The half-appointed, half-elected senate, in turn, has the authority to impeach Yingluck in cases of malfeasance.

As the lower house election became a dead end, the PDRC ramped up its street-based pressure for the caretaker prime minister to resign. But Yingluck refused, citing a constitutional stipulation that required her to remain in office until a successor is found. The protesters want to see the back of Yingluck and to bring about a political vacuum in which an appointed government can be installed to enact reforms that they say are needed to root out Thaksin’s corrupt influence in Thai politics for good.

All this has created space for watchdog agencies — the National Anti-Corruption Commission (NACC), the Constitutional Court and the Election Commission — to act. The NACC has charged Yingluck with malfeasance over her government’s rice-pledging scheme. The Constitutional Court is going after the prime minister for having transferred a senior civil servant without sufficient grounds. Government MPs and some senators are also charged with violating the constitution by trying to make the senate fully elected.

Other potential charges involve the government’s infrastructure overhaul (at a cost of 2 trillion baht), which some claim is unconstitutional, and the pro-government Red Shirts’ campaign to divide up Thailand along regional lines, which some say is treasonous. Any of these could upend the Yingluck government.

In short, Yingluck’s days are numbered. At issue now is what comes after her. If it is a government that includes both sides of the divide, Thailand may be able to navigate a way out. But if it is a partisan anti-Thaksin interim government, more tumult and turmoil can be expected.

It is true that Thaksin has corruption problems and that Yingluck does his bidding. But this would be the third time in recent history that a democratically elected government was overthrown by the establishment.

The first was a military coup in September 2006, which elicited little resistance because Thaksin’s corruption allegations held up in the eyes of most. But when the new military-inspired constitution in 2007 brought up new elections, most of the electorate opted for another Thaksin party. This was rocked by Yellow Shirt protests that culminated with the occupation of Bangkok’s main airport. The Constitutional Court then dissolved the ruling party in December 2008, and the Red Shirts took to the streets, only to be suppressed by the military in 2009 and 2010 until they had their say in Pheu Thai’s election victory in July 2011.

Thailand is going through a déjà vu. The pending ouster of Yingluck is likely to stir radicalised Red Shirt sentiments and bring them back onto the streets. Unless a new election is organised — in which the Democrat Party runs — an unelected outcome is likely. Its legitimacy will be challenged by the international community and its longevity will be tested by those angry at the abrogation of the democratic process, however flawed it may be. Thais must realise that the starting point for any democracy is the will of the majority and that autocratic rule in Thailand ultimately cannot last.

Thitinan Pongsudhirak teaches international political economy and directs the Institute of Security and International Studies at Chulalongkorn University in Bangkok.

Categories: Forum

What Indonesia’s legislative polls do and don’t mean

East Asia Forum - Sat, 04/12/2014 - 05:00

Author: Liam Gammon, ANU

Indonesia’s PDI-P party, the home of Soekarno-ist nationalism, was expecting Wednesday’s legislative elections to carry it to a stunning comeback after a decade out of government during the Yudhoyono years.

It had the good fortune of being associated with Joko Widodo (normally known as Jokowi), the Jakarta governor whose mass popularity had convinced PDI-P’s old guard to give him the party’s 2014 presidential nomination. Opinion polls gave the PDI-P hope: even with a large proportion of the electorate still undecided, research by two highly regarded pollsters showed that 21 to 24 per cent of voters were committed to voting PDI-P more than a week out from election day.

So there was noticeable disappointment on the faces of PDI-P figures who appeared on television on Wednesday evening to spin the results of the legislative elections held earlier in the day. According to preliminary counts, the PDI-P won around 19 per cent of the national legislative vote — far short of the figure in the high 20s that was its target.

The difference is significant: in Indonesia, political parties can only nominate a presidential candidate if they win 20 per cent of seats in the national parliament, or 25 per cent of the popular vote. If they miss that threshold, they need to form a coalition with other parties in order to get over the line.

The narrative snapped into place on Wednesday night. The Jokowi effect was a flop, some of the governor’s critics gleefully said. One explanation advanced by Jokowi defenders and commentators alike was that former president Megawati’s daughter, Puan Maharani, oversaw a communications strategy from PDI-P head office that botched the opportunity to associate the party’s brand with its most popular figure, Jokowi, by putting herself front and centre in advertising.

The recriminations within PDI-P about how Jokowi’s popularity was or was not exploited, and debates amongst analysts about whether it mattered, will likely drag on for some time now. As Ed Aspinall reminds us, crude national-level results cannot capture the complexity of factors influencing the outcome of legislative elections in Indonesia’s open party list system, where legislative candidates run as individuals as much as representatives of parties, often fighting for votes with their own colleagues.

But the significance of Wednesday’s result for what lies ahead in July’s presidential election should not be overstated.

Make no mistake: Joko Widodo will almost certainly be the next president of Indonesia, notwithstanding PDI-P’s disappointing showing at this election. His closest rival in the presidential race, Prabowo Subianto, is running 30 points behind Jokowi in recent opinion polls. Certainly, the usual caveats about the pitfalls of survey research in Indonesia apply — especially given how much the legislative election results deviated from the surveys. But the truth of the situation is pretty self-evident: Jokowi has a huge lead, and it’s difficult to think of a scenario in which this changes that doesn’t involve a terrible political blunder or scandal, the likes of which have not been seen before in his career.

What the legislative elections indicate, then, is that he will have to govern with a coalition that involves some of the other political parties represented in parliament. On election night, Jokowi again declared his distaste for the horse trading which is part and parcel of how Indonesian coalitions are put together. Nevertheless, with PDI-P potentially falling under that crucial threshold of 20 per cent of parliamentary seats required to nominate a presidential candidate, it will need to offer cabinet seats and perhaps even the vice presidency to politicians from other parties. The expectations of some that a PDI-P landslide would occur, strengthening Jokowi’s hand within that party and giving him a degree of autonomy from the demands of others, have not been met.

This does not halt ‘Jokowimentum’. But after July, when Jokowi will probably be elected president, he will have to deal with the behaviour of political allies-of-convenience. And they may not share his preoccupation with responding to public demands for greater social spending and attacking the corruption built into state budgets. As someone who realises how precious his carefully cultivated reputation for honesty is to his political career — and how fragile it could be — Jokowi must dread the prospect of the corruption scandals that will inevitably hit a cabinet stuffed with party politicians.

Jokowi’s critics within the establishment say that he lacks the experience to be president. What they really mean is: he lacks experience playing politics on our terms. The tension between Joko Widodo’s populist instincts, and the pressures to deal with establishment elites in a system in which patronage politics and deal-making predominate, will be at the heart of his (likely) presidency.

Liam Gammon is a PhD candidate at the ANU College of Asia & the Pacific.


Categories: Forum

India’s Look East policy in need of a relook

East Asia Forum - Fri, 04/11/2014 - 17:00

Author: Tridivesh Singh Maini, New Delhi

Does India’s foreign policy suffer from alack of consistent and innovative outreach policies in Southeast Asia?

At a recent East-West Centre conference in Yangon, most participants seemed to feel the answer was yes. Such criticisms are worth mentioning because India’s immediate neighbours, such as Nepal and Sri Lanka often complain that New Delhi intervenes a touch too much in their internal affairs. Some go so far as to argue that China, in spite of being more powerful than India, does not exhibit the same hegemonistic tendencies.

India’s approach to Southeast Asia has been replete with good intentions. The ‘Look East’policy introduced by former Prime Minister P.V. Narasimha Rao in the 1990s was both farsighted and pragmatic, compelled by economic and strategic motives. Subsequent governments led by the BJP and Congress have acknowledged the importance of Southeast Asia. Efforts toward economic integration have taken place through the conclusion of FTAs and a large number of security agreements. India’s private sector has also tried to make inroads into the region. Indian businesses have a strong presence in countries like Indonesia, Malaysia and Singapore, and have recently begun to make their presence in Myanmar.

Yet there are a number of areas where India has failed miserably.

First, India has been slow to counter Beijing’s attempts to expand its own sphere of influence in the region. India’s position on the South China Sea dispute has been characteristically ambiguous and reluctant. Sabre-rattling would be both unnecessary and counterproductive. Yet New Delhi should support countries like Vietnam and the Philippines who are keen to counter China’s increasing assertiveness.India could also enhance its cooperation with allies like Japan, who are similarly trying to increase their foothold in Southeast Asia. In Myanmar, there is growing resentment among locals over China’s growing economic presence, and this creates opportunity that India can capitalise on.

By contrast, Beijing has established a significant presence in India’s immediate neighbourhood, which includes states such as Pakistan, Sri Lanka, Nepal and Bangladesh. India’s blunders in the neighbourhood — including, for instance,its less-than-stringent attitude toward infrastructure projects — cannot be blamed on China, but it would be naïve to argue that China’s forays into South Asia are purely a matter of business.

Second, India has failed to take advantage of the commonalities, both historical and cultural, that it shares with countries in Southeast Asia. In Myanmar,the tomb of Mughal Emperor Bahadur Shah Zafar is well-maintained, yet bereft of visitors. There are a large number of persons of Indian extract who could act as India’s goodwill ambassadors, but the government has shied away from backing them.

Third, India should also be more aggressive in advertising its pro-democracy stance. India cannot afford to avoid doing business with authoritarian regimes. Yet in countries like Myanmar it should tacitly back democratic forces. As a multi-ethnic society, with a large Muslim minority, India cannot afford to stay quiet about the atrocities being committed against the Rohingya Muslims.

India’s Look East policy urgently needs to be revamped. Integrating Northeast India with Myanmar is one possibility which has been touted over the past decade. India first opened channels of communication with Myanmar in the 1990s, when it realised that it could not continue to cede space to China in a country that was India’s geographical gateway to Southeast Asia. Yet the implementation of closer ties has been extremely slow. Without greater connectivity with Myanmar, India cannot achieve a greater presence in Myanmar and other parts of Southeast Asia.

India must improve connectivity through road and air links to make its presence felt in what is emerging as a strong battleground state in Southeast Asia. At present, there are very few direct flights from India to Yangon. New Delhi should encourage its Northeastern states to increase economic and cultural interactions with Myanmar. Chambers of Commerce are already making earnest efforts to do so, but they should get greater government backing.

Hopefully the next government in New Delhi will prioritise economic and strategic ties with the ASEAN region, especially in countries like Myanmar. For this it is imperative that India’s economy gets back on track, and that New Delhi gives priority to its own strategic goals and not the sensitivities of China.

Tridivesh Singh Maini is a New Delhi based columnist and independent foreign policy analyst.


Categories: Forum

US puts the Asian ‘pivot’ into pictures

East Asia Forum - Fri, 04/11/2014 - 05:00

Author: Peter Dean, ANU

The ‘rebalance’ to the Asia Pacific is alive and well according to the recently released US Quadrennial Defense Review (QDR). If a picture tells a thousand words then the United States Department of Defense’s (DoD) latest strategic policy document has some interesting things to say. Eight of the 22 photos in the document focus on the region, and this outstrips the US homeland — the focus of overall US strategy.

Twenty-two pictures illustrate five chapters that cover the strategic environment, rebalancing the joint force, rebalancing defence institutions, and risks of sequestration. On first glance the regional emphasis of these photos provides some revealing insights. After the Asia Pacific and the US, the Middle East comes in third with four images, while Europe gets just two and the ‘Western Hemisphere’ and Africa one each.

The Asia Pacific not only ranks first in terms of the document’s order of analysis for the global security environment, it also fills out twice as much space in the strategic environment section of the document as the Middle East. Europe, Africa and the Western Hemisphere are summed up in only one paragraph each. In discussing the US strategy to ‘Build Security Globally’, again the Asia Pacific is front and centre with the QDR declaring that ‘US interests remain inextricably linked to the peace and security of the Asia Pacific region’.

Afghanistan also features prominently due to current operations, the drawdown of US forces, and the lessons learnt from this conflict. The document also raises the direction of US military posture after the withdrawal from Afghanistan, stating that in the future the US military will no longer be ‘sized to conduct large-scale prolonged stability operations’. Iran and North Korea are also referenced as ‘challenges’ to the United States.

For China the key phrase in the document is the first-page statement: ‘the rapid pace and comprehensive scope of China’s military modernisation continues, combined with a relative lack of transparency and openness from China’s leaders regarding both military capabilities and intentions’. Other key references to China relate to its attempts to ‘counter US strengths’ through increasing A2/AD capabilities, its rapid economic growth, and the need to preserve strategic stability. The document also outlines efforts to develop a ‘sustained and substantive dialogue’ with the PLA, with an emphasis on ‘practical areas such as counter-piracy, peacekeeping, and humanitarian assistance and disaster relief’.

Australia and Iran are also frequently mentioned — but for different reasons. The US is making positive moves towards greater cooperation with Australia, while Iran is a major concern to US security interests.

The context of references about a particular country is everything, as it can often reveal more than the quantity of the references. For example, in the Gillard government’s Australia in the Asian Century White Paper the US ranked only fifth in terms of mentions, well behind China and India and also edged out by Japan and Indonesia. Yet the context of the United States’ mentions was in relation to security — where it dominated that document — and this was the area that the Australian government considered the most important single element for the region’s future prosperity.

Australia is represented in the QDR document, along with Japan and the Republic of Korea, as one of the ‘traditional anchors of regional security’. These three countries along with the Philippines and Thailand, who make up the San Francisco system, are listed as part of US efforts to ‘modernize and enhance [US] security alliances’. In reference to Australia and the UK (in one its few mentions in the document) the US aims to ‘enhance collaboration between our respective defense planning processes’. Australia is also (unsurprisingly) singled out in relation to ‘the full implementation of US force posture initiatives in northern [Australia]’. But, as Peter Jennings has already pointed out, for Australia — as for all of the US allies — there is a lot of food for thought in the QDR.

While there are still many who question the veracity of the overall US commitment to the Asia Pacific — especially since the departure of Hillary Clinton and Kurt Campbell from the Obama administration — the QDR reinforces the Asia Pacific focus of the DoD. It also emphasises what the current US administration noted back in 2011: the US defence posture must be substantially recalibrated in view of its economic circumstances and in relation to the changing strategic environment.

Dr Peter Dean is a Fellow at the Strategic and Defence Studies Centre at the ANU and the current Fulbright Scholar in Australia-United States Alliance Studies. 

Categories: Forum

Is Abe bypassing democracy to push his defence agenda?

East Asia Forum - Thu, 04/10/2014 - 17:00

Author: Takanori Sonoda, Maureen and Mike Mansfield Foundation

Is Prime Minister Shinzo Abe’s new interpretation of Japan’s Constitution constitutional? Seeking to move his national agenda to revise the regime created after World War II, Abe has repeatedly argued for a new interpretation of Article 9 to allow ‘collective self-defence’ actions by Japan’s Self-Defense Forces. He has said that, as the head of the government, he would take ultimate responsibility for a potential reinterpretation by facing general elections.

Abe has commissioned a Council on Security and Defense Capabilities to develop a proposal for a new interpretation of Article 9. He will seek approval from his cabinet members once the council develops a proposal. But there has been strong opposition — even from his own Liberal Democratic Party members and his coalition party — over concerns that if his approach establishes a precedent, any future prime minister can come up with a new interpretation without changing the Constitution.

It is important to remember that the prime minister himself handpicks all the council and cabinet members.

After facing criticism from his coalition party leader and his own party members, the prime minister recently said that he would take the proposal for ‘collective self-defence’ to the Diet. His party is trying to build a consensus within the party on the matter, but no matter what interpretation of the law they come up with, fundamental questions remain. Firstly, is the reinterpretation of law equivalent to writing a law? Under the three branches of government principle, only the Diet plays a legislative role and the court interprets the law. If the executive arm of government authoritatively interprets law, it undermines this fundamental principle. This leads to the question, is Abe undermining Japan’s democratic principles?

Last year, Abe argued for his idea of changing Article 96 of the Constitution, which would make it easier to amend the Constitution. Article 96 dictates that to amend the Constitution two-thirds of Diet members must vote affirmatively and 50 per cent of the Japanese people must support the change through a national referendum. Abe might have concluded that the hurdles presented by Article 96 are too high — so he is now trying an innovative approach to implement ‘collective self-defence’ within the meaning of the Constitution.

Abe’s concept of ‘collective self-defence’ contemplates a situation where the United States is attacked by North Korea and Japan’s Self-Defense Forces act to defend the US armed forces. But how would the Japanese people feel about participating in a war on the Korean Peninsula? The truth of the matter is that national debates have not even started yet on the concept of ‘collective self-defence’. So, the Japanese people have not thought through what it means to them and how it would work in the real world.

Abe argues that inaction by Japan at a time of military attacks against the US armed forces would undermine the very foundation of the US–Japan alliance. For the past 50 years, it has been understood that the Constitution of Japan does not allow self-defence actions unless enemies directly attack Japan. After World War II, the US crafted this constitutional restraint on Japan to prevent future military aggression.

Given this legacy, there are still constraints on how much assistance Japan could offer even if collective self-defence was permitted. Japan’s current military spending is approximately 8 per cent of US military spending, and is limited to 1 per cent of GDP (which has decreased by 3.4 per cent since 2003 through 2012). This is in contrast to South Korea’s spending which accounts for close to 3 per cent of its GDP, (which has increased by 44 per cent since 2003 through 2012), and China’s spending is 2 per cent of GDP (which has increased by 175 per cent since 2003 through 2012).

Abe also seems to be bypassing democratic norms when last year his government passed Japan’s new security law in the upper house without amending its original lower house bill. The Abe administration cut short upper house debates on the bill — effectively nullifying the bicameral safeguards of the Diet. But the passage of the new security law has given Abe confidence in managing the Diet in addition to his handling of the economy. Despite public demonstrations against the new security law in front of the Diet building last year, Abe has been able to maintain a domestic support rate of above 50 per cent.

Economic success is critical for Abe. Unless the economy starts growing, he will not be able to maintain support for his government. There is a limit to fiscal spending in Japan, and there is also a limit to labour productivity growth, even if more female workers participate in Japan’s labour markets. So in order to stimulate consumer spending, the government has lobbied Japanese corporations to raise the salaries of their employees. The reallocation of money from corporations to employees is an important aim for the prime minister.

But is his new approach to the concept of collective self-defence constitutionally viable? And will he ‘sincerely and succinctly explain’ the passage of the new security law to the public? There have been no congressional hearings on these important issues: Abe must not ignore the will and power of the people.

Takanori Sonoda is a Senior Fellow at the Maureen and Mike Mansfield Foundation and was previously a vice president of government relations for Honda North America based in the company’s Washington DC, office.  The views expressed in this essay are his own.

Categories: Forum

Free trade agreements should happen for the right reason

East Asia Forum - Thu, 04/10/2014 - 05:00

Author: Stephen Olson, Economic Strategy Institute

Typically, countries pursue free trade agreements (FTA) with each other because they share common negotiating objectives and subscribe to broadly similar economic principles.

And based on those commonalities, they see benefit in deepening their trade and investment relationship by taking on a higher degree of mutual commitments within the context of an FTA or regional trade agreement (RTA).

Today, however, more and more countries in Southeast Asia appear to be pursuing or considering FTAs based on an entirely different set of considerations. Trade policy has become increasingly driven not so much by a full-hearted embrace of common principles or the objectives of the trade initiative at hand, but rather by a desire not to be left out or left behind as other ASEAN neighbours move forward with bilateral or regional FTAs.

No country wants to see a neighbour and potential competitor gain enhanced access to one or more key markets, while it is left on the outside. More and more countries are jumping onboard when it comes to FTAs or RTAs, so as not to be left standing on the dock when the ship pulls out.

The Trans-Pacific Partnership (TPP) provides a clear case in point on this dynamic. The ostensible defining purpose of the TPP is to create a ‘higher quality’, 21st century FTA. The TPP is intended as something of a ‘special club’ in which a sub-set of more progressive nations within APEC will agree to tougher commitments in a variety of areas, including intellectual property rights (IPR), investor-state arbitration, and disciplines on state-owned enterprises. As a practical matter, this means going beyond the disciplines contained in the WTO or delving into areas not covered at all by existing WTO protocols.

Singapore, Malaysia, Brunei and Vietnam are already in, Thailand appeared (at least before the current political quagmire) to be on the verge of joining, and Indonesia is said to be considering its participation. But with the possible exception of Singapore, have any of these countries staked out strong positions in support of more stringent IPR protections? Have any of these countries argued that large multinational corporations need to be further empowered to challenge government decisions? Have any sought greater disciplines on the conduct of their state-owned enterprises (SOEs)?

Not only is the answer ‘no’, but in many instances there is fairly strong opposition to these core TPP principles. In Thailand, for example, the prospect of greater levels of IPR protection that might circumscribe access to cheaper generic drugs is deeply unpopular. From the Malaysian perspective, investor–state arbitration appears to be highly problematic. And Vietnam, where a new constitution strengthens the primacy of the state in the economy, is unlikely to be enthusiastic about measures to constrain its SOEs.

So if there is ambivalence — to say the least — towards the primary tenets of the TPP negotiating agenda, why are these countries ‘in’? In simple terms, the answer appears to be: to avoid being left out.

There are problems, however, with such an approach to trade policy. In these cases, trade policy is being conducted with an inherently defensive mindset. The priority is not so much to embrace greater openness for its own merits, but rather to seek inclusion in a particular trade initiative as a means to prevent a neighbouring competitor from securing a degree of market access that you don’t also share in.

This defensive negotiating stance can potentially drag the negotiations towards a lowest common denominator approach, and frustrate efforts to provide meaningful openness, let alone craft truly groundbreaking agreements. After all, from the point of view of many participants, pursuing an aggressive and far-reaching agenda of trade liberalisation is not the primary objective. The primary objective is to maintain a level playing field among neighbouring competitors in terms of access to key markets.

The worst-case scenario in all this is that we end up with an additional layer of trade agreements, which further complicate the trade and investment regulatory environment that ASEAN’s private sector, which is overwhelmingly comprised of small and medium enterprises, must attempt to cope with — but which delivers relatively little bang for buck in terms of actual market liberalisation.

Stephen Olson is Managing Director, Asia at the Economic Strategy Institute in Washington DC., and a Visiting Scholar at the Hong Kong University of Science and Technology.

Categories: Forum

Fight or flight for foreign capital in Myanmar?

East Asia Forum - Wed, 04/09/2014 - 17:00

Author: Josh Wood, ANU

Myanmar is in the midst of a foreign investment boom.

Over the last 12 months it has received over US$3.6 billion of foreign direct investment (FDI), an increase of nearly 300 per cent, according to government figures released in February. Despite this encouraging news, enormous barriers to future investment remain, and if reforms are not quickly enacted, foreign capital may take flight as quickly as it has arrived.  

After decades of isolation and under-investment, new FDI flows from across the globe are nurturing industrial modernisation in Myanmar. Of the US$3.6 billion invested last year, around 50 per cent was directed into manufacturing enterprises such as garment making, automobile assembly and food processing factories. These investments in manufacturing are particularly welcome because they offer numerous employment opportunities, have high export potential and create positive spillovers into other sectors of the economy. While China and Thailand remain the dominant sources of foreign investment, new contributions from Qatar, South Korea, Norway and many other countries have driven the recent growth.

The sustainability of such high rates of foreign investment, however, is far from assured. A large component of last year’s FDI resulted from the belated arrival of global brands such as Unilever, Coca Cola and Visa, amongst many others, and the front-loaded investment of Telenor and Ooredoo in the recently liberalised telecommunications sector. These streams can be expected to fall away quickly in the next two to three years and a second wave of FDI will need to follow. Based upon anecdotal reports coming out of Yangon, this may take some serious salesmanship. New entrants are encountering unexpected hurdles in many aspects of their business operations, tempering the appetite for future expansion and sending mixed messages to potential investors back home.

So what are the major impediments to doing business in Myanmar?

Unsurprisingly, weak infrastructure is the problem most commonly cited by foreign managers. The crumbling highway network, inefficient rail connections and poorly maintained port facilities are causing lengthy delays and inflating transport costs. Limited phone coverage, painfully slow internet and inner-city congestion complicates communication and plant monitoring. The electrical grid, after decades of neglect and under-investment, is unable to handle growing demand. Not only is 70 per cent of the population without power, but those with access face the perennial threat of blackouts. For foreign investors, particularly those involved in manufacturing, nothing is more essential than a cheap and reliable electricity supply.

The second major issue is corruption, which not only pervades the upper echelons of government but is also ubiquitous at the township level. Basic administrative tasks such as negotiating rental leases, registering vehicles and many other low-level interactions with the bureaucracy require considerable sums of ‘tea money’ (otherwise known as bribes). Such practices inflate costs and reduce opportunities for foreign firms, and remain an insurmountable barrier for more scrupulous corporations who resist the use of bribery in their day-to-day operations.

A less-reported issue is the severe shortage of skilled labour. Myanmar’s poorly performing education system has failed to produce the number of engineers, welders, carpenters and other tradespeople required by foreign firms. The skills shortage is particularly acute in the oil and gas industry, where English proficiency is often required. In many instances skilled workers have been brought in from host countries, sourced from neighbouring provinces or headhunted from rival firms, all of which are costly and inconvenient.

The final barrier to foreign investment is Myanmar’s ineffective system of dispute resolution. Although the 2012 Foreign Investment Law addressed a great number of legal uncertainties, the process of contract enforcement and dispute resolution needs urgent reform. According to the World Bank, legal disputes take an average of 1160 days to resolve — in this respect, Myanmar ranks 188th out of 189 countries — and require 50 per cent more administrative procedures than the OECD average. While legal systems in the developing world are generally more complicated than those of advanced countries, in comparison to economies of similar sophistication, contractual agreements in Myanmar are harder to enforce and intellectual property enjoys less protection.

Myanmar’s huge investment potential has many costly caveats. If the current rates of FDI are to be maintained, business needs will require more careful consideration from policymakers when setting their reform priorities. And if these issues remain unaddressed, Myanmar could once again be left with only Chinese investors for company.

Josh Wood was a Visiting Research Fellow at the Myanmar Development Research Institute’s Centre for Economic and Social Development (MDRI-CESD) and is a postgraduate student at the ANU.

Categories: Forum

Can China win the war on air pollution?

East Asia Forum - Wed, 04/09/2014 - 05:00

Author: Daniel K. Gardner, Smith College

China’s polluted air — so much in the news these days — has been 30 years in the making.

When Deng Xiaoping introduced market reforms in the late 1970s, the country started its steady rise from the economic doldrums, largely through investment in heavy industrialisation. Since then, its GDP has grown about 10 per cent annually, and its economy has displaced Japan’s as the world’s second largest. 

Industrialisation, the foundation of China’s economic upsurge, has relied on tremendous energy reserves — and most of this energy, about 70 per cent, comes from coal. Today, China consumes slightly more coal than all other countries in the world combined. And each ton of coal that is burnt there produces more than one ton of pollutants, including carbon dioxide, particulate matter, sulfur dioxide and mercury.

The economic prosperity generated by China’s industrialisation has given rise to a burgeoning middle class, which is consuming, heavily — buying televisions, washers, refrigerators, air-conditioners, heaters, larger homes and cars (all significantly increasing the demand for energy resources). In 1978 there wasn’t a single privately owned car in China; today, China is the world’s largest car market, purchasing about 20 million units in 2013 alone. Emissions from these cars spew toxins of all variety into the air.

Coal and cars are the culprits largely responsible for the thick, soupy air that frequently envelops cities like Beijing, Harbin and Shanghai — rendering their skylines invisible and turning day into night. Not surprisingly, this air is dangerous to breathe.

Scientific studies released just this past year show:  1) that pollutants in the outdoor air led to 1.2 million premature deaths in China in 2010; 2) that between 1981 and 2001 average life expectancy in north China was a full 5.5 years shorter than in south China, owing simply to the higher burden of particulate matter there (55 per cent higher) — a result of the region’s heavier dependence on coal for heating; and 3) that while China’s rate of tobacco smoking has remained level over the past three decades the rate of lung cancer has increased 465 per cent, because fine particles (PM2.5) suspended in the country’s air can make their way deep into lungs and lodge there.

These astonishing figures point to a simple fact: China’s air is wreaking havoc on the health and wellbeing of the people there.

The economic costs of air pollution are considerable too. As mortality and morbidity rates rise, so obviously do medical costs and the number of missed working days, leading to lost productivity. In addition, polluted air results in resource depletion: soil acidification from acid rain reduces the amount of China’s arable land and crop productivity; mercury emitted by coal combustion enters the water systems, contaminating water and affecting fish, rice, vegetables and fruits; and airborne pollutants kill off trees and forests.

Chinese citizens are making their displeasure known. In the past few years they have increasingly taken to the streets to express their opposition to the building of coal-fired power plants, waste incinerators, chemical plants, oil refineries, battery factories and the like that pollute the atmosphere, water and soil, and endanger people’s lives and livelihoods. Indeed, just this week hundreds took to the streets to protest a paraxylene plant in Maoming city in Guangdong.

The Communist Party now finds itself caught in an irony of its own making: the economic prosperity it has fostered for the people over the past 30 years is a powerful source of its ongoing legitimacy; but the polluted environment spawned by that prosperity is putting the people’s support for the party — the party’s legitimacy — at some risk. The challenge the leaders in Beijing face is finding the right balance between economic development and environmental protection. They must curb environmental pollution without putting a halt to the country’s economic progress.

Taking this challenge on, the Chinese government has recently promoted a range of policies and measures intended to protect the environment and clean up the pollution. These include shutting down small and inefficient coal plants, banning the building of new coal-fired power plants in key economic zones, putting caps on coal consumption, introducing trial carbon-trading programs in four major regions, and placing a limit on the growth of emission-intensive industries. And recently it was announced that the legislature is considering the implementation of an environmental pollution tax.

To offset the reduced dependence on coal, the government is also looking to expand the energy reserves coming from other fuel sources, namely, natural gas, wind, solar, hydroelectric, and nuclear power (each of which presents its own set of challenges). And to cut vehicle emissions it plans to remove from the roads all cars registered prior to 2005, require the use of the much cleaner China V gasoline, promote the development and use of green vehicles, and expand the public transit systems.

But such plans and measures, in the end, are not likely to count for much unless Beijing confronts what has proved to be the biggest obstacle in its battle against pollution: ineffective implementation and enforcement of environmental laws and regulations.

Ineffective implementation results in part from contradictory messages Beijing sends the country’s lower officials.  The government in Beijing determines environmental policies and measures, and then places the responsibility for their implementation on local officials.  But, these local officials, at the same time, are pressed by Beijing to pursue economic growth above all else; in assessing official performance, in deciding promotions and demotions, the Beijing government gives heaviest weight to success — or failure — in developing the local economy.  As a consequence, local officials are naturally far more dedicated to “growing” the economy than to protecting the environment. Thus, if Beijing is genuinely committed to cleaning up the country’s polluted air, water, and soil, it must refine its calculus for grading and rewarding the performance of local officials. Yes, the leadership routinely proclaims its intention to give greater weight to stewardship of the environment, but, in practice, environmental protection continues to count for relatively little.

A closely related problem is enforcement of environmental policy and law. The government can propose, legislate and talk of a ‘war on pollution’ all it wants, but if there is no central supervisory body or mechanism with real authority, power and resources to monitor and enforce compliance, and to press for the resolution of environmental problems that arise, the war will not easily be won.

Bold structural reform is needed. Today, responsibility for environmental monitoring is divided among at least six state ministries and agencies, with often competing agendas and goals. Environmental authority is simply too disparate, too weak. It is time for Beijing’s leaders to give the Ministry of Environmental Protection (MEP) the sort of comprehensive supervisory power that would transform it into a forceful national environmental protection agency. As the youngest ministry of the 25 in the State Council (elevated from state agency status only in 2008), with a meagre staff of 300 (the US EPA has more than 17,000), the MEP presently has little real capacity to take command of the nation’s environmental challenges.  Nor, it might be added, can it do much to enforce local compliance with environmental regulations.

If the Chinese government is genuinely committed to winning the war on pollution, it is time to endow the state ministry responsible for environmental protection with the level of staffing, funding and authority that reflects that commitment.

Daniel K. Gardner is the Dwight W. Morrow Professor in the Department of History and Program in East Asian Studies at Smith College, Northampton.

Categories: Forum

Why no investor–state arbitration in the Australia–Japan FTA?

East Asia Forum - Tue, 04/08/2014 - 17:07

Author: Luke Nottage, University of Sydney

Australia and Japan finally concluded a bilateral free trade agreement on 7 April 2014.

Some Australian media outlets had prior inklings that negotiations had achieved significant breakthroughs, especially for agricultural market access into Japan, but a frequent assumption was that Australia must have ‘given up’ something major in return. Concerns were expressed that this included measures favouring Japanese investors into Australia, especially protections from investor–state dispute settlement (ISDS, especially arbitration) provisions. These provide an extra avenue for foreign investors to enforce the substantive treaty rights limiting a host state’s capacity to illegally interfere with foreign investments (like through expropriation). They add to the (more politicised) inter-state arbitration procedure invariably included in investment treaties, as well as any rights under domestic law available through the host state’s court system — particularly problematic in developing countries.

ISDS provisions had been added to the South Korea–Australia FTA concluded in December 2013 by the Abbott government, which also declared that it was reverting to a case-by-case approach to ISDS. This contrasted with the position taken by the 2011 Gillard Government Trade Policy Statement, which had reversed Australia’s longstanding treaty practice by declaring that it would not agree to any forms of ISDS in future treaties — even with developing countries. The 2012 Malaysia–Australia FTA omitted ISDS, although that was meaningless in practice as ISDS remains available to enforce similar substantive rights under the 2009 ASEAN–Australia–NZ FTA. Curiously, however, the new Australia–Japan FTA ultimately omitted ISDS provisions as well. Why is this, and what are the broader implications?

We will never really know the reason, as treaty negotiations are kept confidential, but presumably Japan (the net capital exporter, especially for FDI) did not push very hard for ISDS — even though such protections are included in almost all its other investment treaties, including recently with Switzerland. The government would have consulted with key Japanese business groups, including the Nippon Keidanren which since 2000 has been pushing for ISDS, but large-scale Japanese investment into Australia (dating back to the 1960s) has not encountered major adverse treatment by Australian government authorities.

More generally, Japanese investors are still risk averse and prefer to take a long-term view if disputes arise, so they have not yet directly availed themselves of ISDS provisions provided in any Japanese treaty — even with developing countries. Japanese investors tend still to negotiate amicable settlements directly with the host state or through the informal good offices of their own government — although perhaps now more often ‘in the shadow of the law’, including international investment law, as evidenced by a Japanese aluminium joint venture’s recent claim settled with Indonesia (albeit based on an arbitration clause in their contract, not a treaty).

In the FTA negotiations with Australia, the Japanese government may also have not wanted to press too hard to secure ISDS protections because this would probably have involved conceding even more access to Japan’s politically sensitive sectors, such as agricultural markets. Prime Minister Abe will already face fire domestically from rural voters, especially as the commitments made in this bilateral FTA will form a new benchmark for negotiating the expanded Trans-Pacific Partnership Agreement (TPP), involving other major agricultural products exporters including New Zealand and the USA. [Prime Minister Abe would also have been conscious of some popular concern about ISDS generally, epitomised by a TV Asahi program last year - although mainly from Opposition party members and supporters, and not as strong as in South Korea (in the context of its FTA with the US and a pending ICSID claim indirectly from a US investor).]

Australian government negotiators were presumably happy enough with existing concessions, deciding that any extras offered from Japan in exchange for ISDS protections were not worth it.

By not agreeing to ISDS, the Abbott government also could signal that it expected better trade-offs to be offered in Australia’s other ongoing negotiations for bilateral FTAs negotiations (especially with China) and regional FTAs (the TPP, and Regional Comprehensive Economic Partnership [RCEP] or ‘ASEAN+6’ FTA). In addition, it could deflect some domestic political pressure from those cautious about foreign investment generally (linked to the government’s rejection recently of a major US agri-business investment proposal) as well as ISDS (evident from the Trade and Foreign Investment (Protecting the Public Interest) Bill 2014, brought before the Australian upper house by a minority Greens Party senator from Tasmania — and therefore unlikely to be enacted).

Conversely, omitting ISDS holds little downside for Australia’s investors into Japan, as they have limited existing and likely flows of FDI into Japan (which anyway has a high-quality court system and domestic law protections for all investors).

Nonetheless, omitting ISDS from the Australia–Japan FTA may have significant long-term consequences. What happens if Australia also ends up omitting ISDS with developed country negotiating partners in regional agreements such as the TPP, having done so already in its bilateral FTAs — as with the USA (2004), New Zealand (2011), Malaysia (2012) and now Japan? If this occurs also with Singapore, Chile and Canada, which also have robust domestic law systems, then the other five TPP negotiating partners may also seek exclusion of ISDS — arguing that what is ‘good for the goose is good for the gander’.

An ‘anti-ISDS’ mood might spread throughout other parts of Asia too, affecting also the RCEP negotiations, despite the gradual acceptance of treaty-based arbitration within the region — epitomised by the 2009 ASEAN Comprehensive Investment Agreement. After all, last year India announced a ‘review’ of ISDS in their treaties, and last month Indonesia declared that it wished to terminate its bilateral investment treaties — although without mentioning its regional treaties or FTAs. Such postures are related to domestic politics, including general elections soon in both countries. But it should also not be forgotten that India, Vietnam, Thailand and Laos are still not among the 150 states that have ratified the 1965 International Centre for Settlement of Investment Disputes Convention, which provides further support for ISDS procedures.

Including or not including ISDS may not have held much significance for the Australia–Japan FTA itself, but its omission could have wider repercussions for the broader treaty-based arbitration system.

Luke Nottage is Professor and Associate Dean at Sydney Law School and founding co-director of the Australian Network for Japanese Law (ANJeL).

A version of this article was also published here on the ‘Japanese Law and the Asia-Pacific’ blog.

Categories: Forum
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